Paddy Power, a bookmaker, became Ireland's largest financial institution by value yesterday, overtaking the country's banks. The news was more than symbolic. Irish banks and Irish bookies were both in the gambling business, only the bookies were better at judging the risks. Yesterday, Irish taxpayers had to pay out heavily as a result.

In Dublin, a humiliated and desperate government launched what it called the National Recovery Plan 2011-2014. The title was optimistic, the contents apocalyptic. Ireland faces tax rises of ¤5bn and spending cuts of ¤10bn, on top of the already announced cuts of ¤15bn. VAT will hit 24% by 2014. Wages will fall. So will the standards of the country's already struggling public services and the prospects of any solid return to growth on the scale needed to start paying off the debt. Ireland, which entered the financial crisis with one of Europe's lower debt-to-GDP ratios, is being reduced to beggary by the profligacy of its banks and the state's determination to shoulder the burden of supporting their impossible lending. What began as a private-sector banking crisis now threatens the viability of the state.

Scourging itself, Ireland has secured the help of eurozone countries and the British Treasury. Indeed, they forced themselves on the country in advance of any actual Irish need to borrow more money, in the hope that bond markets would calm down and not knock over a series of indebted eurozone states, each crisis triggering another. The problem is that the markets can see through the ruse. This week Standard & Poor's cut its credit rating for Ireland, and yesterday, despite the government's plan to cut borrowing to 9% of GDP – lower than in Britain – yields on 10-year Irish bonds rose. Reasonably good economic news from the United States, Germany and even Britain only served to expose the market's chosen victims still further. Portugal, thought to be the next in line after Ireland, is being hammered; so, much more worringly, are Spain and Italy. Crises that began in small economies are creating alarm about larger ones, and a general collapse of trust in Europe's ability to pay its way.

In each case the problem is different but the consequences are the same. Greece's national accounts turned out to be fiction and the state inept. In Ireland the banks were at fault. In Spain it was a mixture of both. The substance or otherwise of the real economy – Spain and Ireland at least do have serious and partly prosperous private sectors – counts for less than a City game of second-guessing about the possibility of default. The euro, which was supposed to encourage a growing together of European economies, is instead being threatened and weakened by the exacerbation of differences. In practice, if not in title, there are already two different eurozones: a Germanic, northern one, including Germany, Austria and Finland, and the weaker, threatened peripheral states, such as Greece. About all they have in common is a currency, and perhaps not that for ever.

European governments, led by Germany, have so far kept just ahead of the markets, rescuing Greece and Ireland. But that success has not been matched by any deeper co-ordination: individual states have been left to cook up their own austerity plans and tax policies. Even in its enfeebled state, Ireland clung on yesterday to its 12.5% corporation tax rate. Without it, the short-term economic collapse might be worse, but its continuation only emphasises the disunity lying behind the apparent success of short-term bailouts.

Piecemeal firefighting may not quench the firestorm threatening to engulf the continent. The European economy became dependent on Germany's ability to run current account surpluses and export capital to poorer parts of Europe, where it was spent on property. That system is broken for ever. No one knows what will replace it. Meanwhile, everyone is afraid.